Micro mining gems with pay dirt potential

It’s hard to get excited about a stock trading at 0.04c (less than half a cent), unless that’s your entry price, and 48 hours later it is trading at 0.08c which, even at such low prices, is a double-your-money event.

Earlier this month, that’s what happened to Redbank Copper (RCP), a stock that very few investors have followed thanks to a past record of poor management, an empty bank account, and 18 months on the suspended list of the Australian Securities Exchange.

Everything started to change on May 10 when trading in Redbank shares resumed on the ASX, followed last Tuesday by an announcement that the stock had been recapitalised, new management injected, old debts paid, and work on the company’s flagship copper project in the Northern Territory had recommenced.

Redbank is an example of a “born again” stock, one of the many to have fallen to the bottom only to be revived by an injection of $8.2 million from investors associated with Perth mining entrepreneur, Michael Fotios, and the Wyllie family, who inherited the multi-million-dollar fortune of the late Bill Wyllie.

Until the revival, Redbank was also a member of a club full of reluctant members, thinly-traded ASX stocks valued at less than $10 million, not researched by mainstream stockbrokers, and seemingly having little hope of climbing up from the bottom of a crowded barrel.

Just how crowded is one of the untold stories of the ASX, which prefers to feature its top 300 stocks where the market capitalisation is above $250 million, and where brokers feel more comfortable with the law that requires them to “know their product, and know their client”.

Unfortunately, for the majority of ASX stocks, that leaves them on the outer and, in the case of the genuine cellar dwellers, the outer could well be the vacuum of outer space where no one can hear a good story, and most investors diligently avoid.

But, by eliminating stocks valued at less than $10 million, an astonishing 37% (670 companies) of currently quoted equities are excluded from research lists – or 42% of the 1,981 securities named by the ASX if 167 suspended stocks are included on the “dead man” list.

Redbank’s resurrection is a reason to rummage around the forgotten 670 because, while there are good reasons why the vast majority have dropped off most investment-selection radar screens, the mass exodus from small stocks over the past few years has seen some gems discarded with the trash.

Finding those hidden gems is not easy, but the reward can be substantial, as a few other examples illustrate:

• Pegasus Metals (PUN) was trading at 10.5c on April 30 before announcing a copper discovery at its Mt Mulcahy project near Cue in central WA, when it rocketed up by 257% in a day to 37.5c before easing back to trade yesterday at 18.5c. Pegasus has a common link with Redbank in the form of director Michael Fotios, who is the current hot small-mining promoter working the ASX.
• Adelaide Resources (ADN) was trading at 4.2c on April 29 before running up to 25c after reporting highly encouraging copper assays from its Moonta project on South Australia’s Yorke Peninsula. The stock is now back to around 9.1c, but with a cash backing of $2.4 million, competent management, and an enviable tenement position in one of Australia’s most prospective copper provinces.
• Caravel Minerals (CVV), which doubled from 1.7c to 3.5c last week after announcing a copper and molybdenum discovery near the WA wheat-belt town of Calingiri. Despite a tiny market capitalisation of $4.4 million, Caravel’s board includes a once-prominent mining company director, Peter Alexander, a former chief executive of Dominion Mining.

For anyone interested in the bottom 37% of the ASX, where the sub-$10 million stocks can be found, there are some important rules.

Risk is high. The basement brigade is not a place where investments are made. It is a place of speculation and trading. Profits should be taken as soon as they are made.

Now is a time of death and re-birth, especially at the bottom end of the resources sector. In previous cycles some share traders have done well simply by acquiring a portfolio of ultra-cheap stocks, those trading at a fraction of a cent, and sold at the first sign of revival.

Because picking individual winners is virtually impossible, a portfolio of “penny dreadfuls” is the best way to play the cheap end of the market – in much the same way venture capitalists might back 10 emerging technology situations in the hope of picking one or two winners.

Rules of the game include looking for companies with aggressive management and a willingness to promote the story. There also should be cash backing to ensure survival during tough times, or a project with potential value that might be recognised if/when the overall market recovers, or which can be sold for more than the company’s market capitalisation.

As a starting guide, here are seven examples of stocks which fit some, or all, of the selection criteria.

• Musgrave Minerals (MGV) is trading at 7.8c, which values the company at $9.4 million, less than the March 31 cash balance of $10.7 million. Recent drilling at the Menninnie Dam project in South Australia has returned encouraging zinc, silver and gold assays.
• Montezuma Mining (MZM) is trading at 12.5c, which values the company at $8.8 million, a value 76% covered by $6.7 million of cash in the bank. Management is well connected in the mining world and the company has a number of promising copper and manganese prospects.
• Gunson Resources (GUN) is trading at 2.2c, which values the stock at $6.9 million, but it is almost out of cash ($753,000). The company is in the middle of a management shuffle after failing to find a partner for its Coburn zircon project. The appeal of Gunson lies in the Coburn resource and the potential for a bid from a bigger miner, either for Gunson or Coburn.
• Carbine Resources (CRB) is trading at 3.5c, which values the stock at $4.9 million, making it another explorer trading at less than its cash backing of $5.7 million. The prime asset currently on Carbine’s books is a gold prospect in the west African country of Burkina Faso, but that could change as an aggressive management team goes bargain hunting.
• Mithril Resources (MTH) is trading at 2.6c, valuing the stock at $5.7 million, which is 40% covered by the $2.3 million cash. The primary appeal is the quality of the company’s exploration team, which has a solid track record of discovery and competent management.
• King Island Scheelite (KIS) is trading at 5.5c, which values the stock at $5.3 million, but it also has little cash in the bank ($932,000 at March 31). King Island’s appeal is ownership of one of Australia’s original tungsten deposits on King Island off the northern coast of Tasmania. If the current management team cannot re-develop the project someone else will, either by buying the company or the asset – much like Gunson.
• Uranium Equities (UEQ) is trading at 2.4c which values the stock at $6.3 million. It has ownership of a unique uranium-from-fertiliser extraction technology, which could prove valuable when proved. Cash is tight despite a partially successful rights issue, which closed this week after raising $850,000, but with a big shortfall ($1.3 million), which the directors can now place.

None of the stocks mentioned are within a country mile of being regarded as investment grade. They have speculation written all over them.

But one thing older observers of the market have seen happen many times in the past is that periods of low prices pass, either because of a widespread recovery, because of deals done in the basement, because of a “trigger” event such as a major mineral discovery, or even the benefit of a lower Australian dollar exchange rate that could re-kindle overseas interest.

With many small mineral exploration companies now trading below cash backing, and with sufficient cash reserves to survive the current period of depressed demand, it’s an interesting time to start hunting for stocks that have the potential to rise quickly.